How to make a million – slowly by John Lee
Much as an academic doyen might conclude a famous lecture series by collecting the salient points into a book Lord Lee, the doyen of ISA investment, marks the end of his interesting and informative My Portfolio column in The Financial Times with the publication of this short book. It has much to recommend it.
First, we must recognise the authority conferred upon the author by his extraordinarily strong track record. An average annual return of c.21% places him firmly in the upper echelons of all investors and the longevity over which this figure has been attained only serves to reinforce the idea that Lee is “a serious private investor”, as he describes himself in the book. As one might imagine, the book is full of insights gleaned from a long career of what I would term “proper” investment; visiting companies, reading annual reports, judging boards and management teams, assessing their incentives and holding shares for the long term.
Lee locates himself in the tradition of ‘value investment’ generally accepted to have its foundations in Benjamin Graham’s Security Analysis although, as with all investors, his style is really unique to his personality. It is this adaptation of a successful style that I believe marks out really great investors. To quote Jose Mourinho on the subject, “With a mentor you can improve and have a base for evolution, but when you try and copy, the copy is never the same as the original. So I think you have to learn from people with more experience who have had success, but always keep your own personal identity”. While Lee never mentions Graham or his co-author Dodd, I think he clearly lies within this ‘school’ of investment. Indeed, he does mention “The Dean of Wall Street’s” star pupil, Warren Buffet, who has had consistent, long term success adapting the value style with his partner Charlie Munger at Berkshire Hathaway.
There’s much to learn from this pithy volume. The points are made concisely and summarised clearly, as one would expect from a mind expert in focusing on the important details in a complex situation: Seek shares displaying both a decent dividend and good prospects for capital growth. Try to buy on modest valuations. Avoid making forecasts about the direction of the market or economy. Identify companies with a proven track record of profitability and dividend payment. Hold shares for the long term; a minimum of five years. Ignore minor share price movements. Focus on conservative, cash generative companies with low levels of debt avoiding start ups, biotech and exploration companies. Search for strong, stable board members with significant share holdings in the company themselves. Don’t overcomplicate valuation methodology. Don’t buy shares in businesses where you lack even a basic understanding of the industry. Look for a stable, high quality board. Pay close attention to optimistic or improving CEO and chairman’s statements in annual reports.
Alongside these excellent pieces of practical advise we find recommendations of less objective character; but by no means less valuable. Lee counsels us that very small companies are often overlooked by large fund management and stock broking firms. Investors should attend AGMs as it gives an opportunity to judge the managements’ body language and ask questions. It may also reveal rifts between managers or between board and management and gives opportunity to chat and gossip with the company’s executives and form a judgement as to their character and sensibilities.
Lee is refreshingly honest about his own mistakes and spends considerable time analysing their morphology rather than simply gloating about his considerable successes. Again, this strikes me as a mark of good a investor as there is invariably more to be learned from one’s failures than one’s successes; the usual outcome of the latter being overconfidence and complacency in my own experience! From these frustrations, Lee establishes some general rules. One is that losers should be sold after a 20% loss. However, this strategy, approximating a ‘stop-loss’, would be anathema to a more puritanical value investor. Another is that winners should be run and not ‘trimmed’ or ‘top sliced’. Lee relates how he has often pruned his holdings in winning shares only to regret the decision when they shows further gains in the long term. Here, again, we find Lee at variance with classic value investment, which would espouse a strategy of selling once ‘fair value’ had been reached, ordinarily book value. It is this kind of modification that contributes to Lee’s brilliance. While Lee makes low price, judged by a decent yield and a single figure price / earnings multiple, central to his search for new ideas this criterion does not seem to carry such weight for his selling practices. We can see this from the fact that large portions of his portfolio now trade on quite dear valuations, even if they were purchased on ‘double eights’ and ‘double nines’ (shares with a yield of 8/9% and the same price /earnings multiple) as Lee calls them. This shows Lee’s inclination to hold on to shares in good quality businesses where the management and board have shown themselves prudent and honest stewards for the shareholders. While I wouldn’t take issue with this practice as I believe that quality trumps value in the long term a value investment purist would surely argue that the more expensive stocks should be sold and replaced with those selling at a discount to book value so as to re-establish a ‘margin of error’ and avoid losses from sharp de-ratings. Lee also shows himself to be a bona fide long term investor by this practice of holding shares indefinitely.
All told, I thought this was an excellent exposition of the basics of a modified value investment style expounding much investment wisdom in a relatively short volume.
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How to make a million – slowly by John Lee
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